Implement the Bandit Strategy with Bollinger Bands

The bandit strategy is one my favorite bollinger band trading strategies. It is a strategy I’ve used for many successful trades in my career as a trader. In this article I will share with you how to anticipate financial market volatility and move ahead of the market using the bandit strategy.

This strategy is custom made for traders who like to take advantage of highly volatile movements in the market. But, before you read any further get yourself mentally ready to steal some amazing trades from the market. The key is to just be patient and wait for the right set-up; it might take some time for the right moment to come along but when it does it’s definitely worth the wait.

This article address some technical terms which will be defined as they are brought up as I outline the bandit strategy. At this moment you might be asking yourself, ‘what is bollinger bands trading?’ So, before we get into the specific details of the bandit strategy, I want to discuss what exactly are bollinger bands and how do you use them for trading.

What is bollinger bands trading?

Bollinger bands are a technical analysis tool developed for trading in the financial markets in the 1980’s. Since then, using a bollinger bands trading strategy has become extremely popular among traders in stocks, bonds, forex, and binary options. The graph measures a relative high or low price of the assets in comparison to previous trades of a unique asset. The prices are represented in bands which are generally a moving average of the previous trades. The default moving average is 20 days. A bollinger bands trading relies on this analytical view to determine if the underlying asset is overbought or oversold.

When is the right moment to trade?

To determine if it is the right moment to make your move, all you need to do is analyze the bollinger bands according to the following:

Deviation 2.0; period 20

Deviation 3.0; period 20

In basic terms, wait for a highly volatile market movement in which there is a significant increase or decreases in the slope of bullish or bearish trend respectively. The trend should cross 3 standard deviations of the bollinger band as shown in the chart below.

In the above chart that are two examples of when the trend line crosses the bollinger band along the 3rd standard deviation. 1) Buy Example for an intraday trade – a trade that takes place during the day. 2) Sell Example where the daily candle is closed. (The daily candle closes everyday at 5pm EST in the United States. Therefore, if you are trading in London, for example, the daily candle will close out at 10pm. Everybody around the world sees the same data, however, the time is relative to your location around the globe.)

How to set up the trade:

When the candle crosses the bollinger bands at the 3rd standard deviation, or even better if candle closed above 3rd the standard deviation place 2 positions:

Major trade:

Investment level: significant amount

Trade type: touch

Minor trade:

Investment level: smaller amount

Trade type: touch

To reiterate the ideal position, your best odds for a successful trade exist when the close price of the candle is above or below at the 3rd standard deviation of the bollinger bands.

Limitations:
Make sure the distance from the 3rd standard deviation of the Bollinger bands to the 20 day moving average is at least 80 pips. (A ‘pip’ is the smallest price change a given exchange can make. Most currency pairs are priced to four decimal places. So the smallest price change is on that last decimal place.)

Time frames:
You can take advantage of the bandit strategy across all time frames except for 1 minute. In general, the longer your time frame the greater your chances of expiring in the money. Recommended time frames: Monthly, Weekly, Daily, 4 hours, 1 hour, 15 min.

Use the above rules to succeed at the bandit strategy, and take advantage of volatile market moves. Once you feel comfortable implementing this strategy you can optimize your timing by searching for the right moment to place your trade. At same time analyze the chart from the highest time frame to the smallest.

Until you have gained a competent level of fluency in the bandit strategy, I suggest you try it out on a demo account, an incentive offered on most platforms. A demo account will allow you to optimize your bollinger band trading skills with real time data without risking your hard earned cash.